Russia seeks economic boost with investment in Siberia

July 30, 2016

By Holly Ellyatt, CNBC

Once infamous as a place of exile and no-return during the Tsarist and then Stalinist eras, Siberia is being touted as a beacon of light by the Russian government as it looks east, rather than west, for growth potential.

Mineral and metal-rich Siberia is already home to oil, diamonds, gas and coal producers and in April 2013, Russia announced a billion-dollar investment in the region. Russian Prime Minister Dmitry Medvedev ordered the government to devise a "Far East Development Program" totaling $16 billion to develop Siberia and its environs by 2018, saying it was a top priority for Russia.

"There will be payback for money invested into the region," Medvedev said during a trip to the region in April, forecasting trillions of roubles would flow back into the Russian economy.

The Russian government will focus on boosting the capacity of the Trans-Siberian railroad, the development of regional aviation, airport and seaport infrastructure and the building of highways as well as developing the already-established energy sector, according to a report by state news agency Ria Novosti in April.

Although the government has not explicitly linked its plans to invest in the region to high growth in China, Russian energy companies developing pipelines to China have already benefited from the program's potential. In March, China's state energy group CNPC signed a number of billion-dollar deals with Russian oil and gas giants Rosneft and Gazprom on the back of plans to develop pipelines and transport networks to transport resources from Siberia to China.

Artem Volynets, chief executive of En+ Group, a diversified mining, metals and energy group controlled by Oleg Deripaska told CNBC that Siberia's proximity to growing Asian markets was central to Russia's investment in the area.

"Eastern Siberia region is located in great proximity to China and Asia where the center of economic activity is shifting to. If you look at the map – it takes only two hours to go by plane from Irkutsk, the center of Eastern Siberia, to Beijing," he told CNBC.

"The proximity to Asia and wealth of resource of Eastern Siberia enables Russia to capitalize on Asian countries' growing demand and to drive the region's economic growth," he added.

At present, China imports core mineral resources from Australia, Brazil and South Africa. But Siberian mineral resources are located in closer proximity, Volynets noted. Cargo transportation from Brazil to Shanghai by sea takes as long as 35 days, from South Africa it takes 20 days and from Australia it takes around 14 days – while from the Vanino Seaport in Siberia it takes only 4 days.

"Transportation by railroad from the Eastern Siberia across Mongolia will take only one day. With oil prices going higher and higher the transportation costs of commodities will increase too and this will make Siberian commodities more competitive in the long term," he said.

"We believe now it's the right time [to develop Siberia], but the government should move quite quickly," he said.

Experts and investors are divided on how much sense investment in the region makes however.

Lilit Gevorgyan, Russia and CIS, Europe analyst at economic and financial research firm IHS Global Insight said the Russian government's move was all about tapping into Asian markets.

"It is not news that Russia's Siberia desperately need investment and (a) boost to its economy. The region's wellbeing has always been critical for Moscow, but the problem for a long time is lack of vision and a roadmap as to how to turn the vast and largely inhospitable but resource-rich lands from being a simple raw material supplier into a key player in Russia's economy and further in Asia –Pacific," Gevorgyan told CNBC.

She said a driving force was Russia's search for a prominent strategic and economic role in the Asia Pacific region as it seeks to diversify its energy markets away from Europe and its financial crisis.

"Russia is aiming to develop not only as a European but also as an Asian nation. The euro zone sovereign debt crisis as well as the changing nature of energy markets with the arrival of shale gas has prompted the Russian authorities to be more proactive in diversifying the country's energy export markets and also tapping into growing Asian markets. The construction of the East Siberia – Pacific Ocean pipeline is already helping Russia to achieve the goal of energy export route diversification," she added.

Neil Shearing, chief emerging markets economist at macro-economic research firm Capital Economics told CNBC that investment in Siberia belied the growing structural problems that Russia needed to tackle urgently.

"Investing in Siberia is the tip of an iceberg compared with Russia's structural problems. The Russian economy has slowed substantially over the last twelve months and its growth model has been propped up by oil prices. The bigger issue now is that there are growing structural problems and it's got to explore other options for growth."

Siberia holds just under 80 percent of Russia's oil resources, according to the government. It is also home to around 85 percent of its natural gas, 80 percent of its coal and similar amounts of precious metals and diamonds, and holds a little over 40 percent of the nation's timber resources, making it a prime location in which to exploit those other resources.

"True, Siberia has more natural wealth than any other place in the world. But it also has unequaled disadvantages of cold and remoteness," Clifford Gaddy, an economist at the US think tank the Brookings Institution told CNBC.

He pointed out that the government also needs to consider a particular problem Russia faces: its shrinking labor force. The vast Siberian area is home to just 6 million people out of Russia's total population of 142 million. IHS Global's Gevorgyan agreed that without an adequate labor force any grand economic development plans are unlikely to materialize.

"Russia's most critical bottleneck in the next 20-30 years is its shrinking labor force. Under those circumstances it makes no sense to have policies to attract more people to Siberia – that weakens the national economy," he told CNBC.

The author of a book called "The Siberian Curse," Gaddy said it was unlikely that Siberia's industry would expand beyond resource extraction and was adamant that plans to develop the region were foolish.

"Putin wants to spend tens of hundreds of billions of dollars to subsidize manufacturing, high-tech, or build infrastructure or whatever in Siberia in defiance of sound economics (and to the detriment of Russia's national economic health," Gaddy said.

The profitability of the venture will depend on the continued commitment (and resources) from the government to subsidize the East, Gaddy said, a moot point considering that source of funding to develop Siberia is not yet resolved. Medvedev has proposed using cash from Russia's pension fund to finance the program which also envisages loan funds and private investment as well as state funding,

"The Russian state will have to continue to be strong enough to channel resources to that end. This gets to the question of the durability of the Putin regime and/or the likelihood that any successor government will share his same commitment and ability to distribute oil and gas rents (because that's where the wealth comes from) to subsidize Siberia," Gaddy said.